Chip Stocks Rallying In August, But September Looms

NEW YORK -(Dow Jones)- During the normally listless dog days of August, chip stocks have staged a rally, but some caution it could be short-lived.

The Philadelphia Semiconductor Index, known as SOX, has surged through the first half of the month, reaching above 375 and gaining 8.3% since the end of July, outpacing the 0.8% gain on the Standard & Poor's 500 Index and more than double the percentage gains on the Nasdaq Composite.

Investors seem emboldened by the attractive valuations - the SOX hit a five-year low in July - and comments from industry leaders that suggest fears of a broad consumer-led downturn in tech are overblown.

"I feel pretty good about this rally for the next couple of weeks. There's a pretty good likelihood it continues," Wedbush Morgan analyst Patrick Wang said, although cautioning that in the normally back-weighted third quarter, data from September will be key in sustaining the surge.

The semiconductor rally, though, is not continuing Wednesday, as the SOX is down 1.4% amid a broader market sell-off and despite optimistic comments late Tuesday from Applied Materials and strong gains from graphics chip maker Nvidia.

And despite the recent gains, the SOX remains more than 25% lower than a year ago, as many components have fallen out of favor with investors. Over the past 12 months, Texas Instruments has fallen almost 22%, Advanced Micro Devices is down more than 60%, and Broadcom has lost more than 25%.

Among companies still searching for a bottom in the memory chip supply glut, SanDisk is down more than 70% and Micron Technology has lost almost 60%.

Nonetheless, to many, the stocks appear attractive in the near term.

"August trends look OK. Given that these stocks have been hammered for the first half of the year, the risk/reward looks pretty reasonable," Raymond James chip analyst Hans Mosesmann said.

Second-Half Concerns

Concerns remain about the second half of 2008 and the critical back-to-school and holiday sales seasons. Brian Piccioni, an analyst with BMO Capital, said that while chip demand has been seasonally in-line so far, the second half remains a big question mark.

"In most tech businesses, the supply chain is so carefully run that the guy who is giving you guidance today doesn't yet know what his quarter looks like," Piccioni said.

Chip investors have seen similar rallies before, only to be disappointed. This spring, the SOX spiked 25% to above 420 between mid-March and mid-May before falling nearly as fast to under 340 in July. Investors fled the sector, worried that a slowdown in consumer spending on computers and electronics would lead to lower orders and fears of a continued supply glut in memory chips.

So far, though, those fears haven't been realized.

"The order rates for chips are seasonal, and we're seeing a fairly reasonable seasonal build," Mosesmann said.

"We're not seeing any evidence of overheating. We went through the first seven months of the year," he said. "There was no unusual accumulation of inventory that makes you say, 'Aha, red flags.'"

Soothing Comments

The recent rally follows an earnings season that featured soothing comments from industry executives. It started in mid-July, when industry bellwether Intel reported a solid second quarter, reflecting continued global demand for PCs and notebooks, and gave third-quarter guidance above expectations, although cautioning about the prospects for continued strong demand through the second-half of 2008.

More recently, tepid outlooks from widely watched companies - including Cisco Systems and equipment maker Applied Materials - which in a more bullish climate might send shares tumbling, have resulted in upticks, a sign that investor sentiment on the sector has improved.

The latest example came Wednesday as investors piled into Nvidia and Applied Materials. Both companies have been knocked around recently - Nvidia by stronger-than-expected competition from graphics chips made by Advanced Micro Devices, and Applied Materials due to spending cuts by memory makers.

Nvidia shares recently were up 9.2% to $12.09 following the graphics chip maker's second-quarter report of a widely expected loss along with a $1 billion increase to its stock buyback program. Applied Materials shares were up 5.2% to $19.43 after reporting a 65% drop in net profit accompanied by an optimistic outlook on the memory chip market by Chief Executive Mike Splinter.

Applied Materials provided a small boost to the semiconductor equipment sector battered recently because of the extended glut in memory chips. Among those benefitting were ASML Holding up 1.1%; Novellus Systems, up 1.7%; and FormFactor up 2.2%.

-By Jerry A. DiColo, Dow Jones Newswires; 201-938-2007; jerry.dicolo@dowjones.com

(END) Dow Jones Newswires

Posted to the site on 13th August 2008